Teachers Should Look at Their Retirement Account
My Paraprofessional Job
In my younger years, everyone thought I would follow my eldest sister’s footsteps as an educator. She majored in Education and then started her career as a teacher and moved up to her current position as an administrator for Montebello Unified School District. Everyone believed further that I would be in the same trajectory as her as I took a job as a paraprofessional (teacher’s aide) at Los Angeles Unified School District during my university years even though I was majoring in Business Administration. At that time, I recall it was tough being a teacher as the first rounds of budget cuts began to roll out around the state and throughout the district. The fear of charter schools coming in and taking over empty classrooms was a prominent fear by principals and teachers. Teachers also did not know if they would be returning next year if they did not have the seniority.
Although my major was not Education, I consistently worked well with breaking down concepts & lessons to children, and many teachers sought me to be their aide because of the way I worked with children and my work ethic. I found an opportunity as a school’s computer lab/technology department universal paraprofessional when the principal was looking to supplement mathematics with an online math program.
Since I would be assisting multiple teachers because of the computer lab and this new online math program, the topic of investments and finances became a more prominent conversation while we worked together. At that time, I had already been investing my money since I was 18 years old. Simultaneously, the lessons that I learned while attending university solidified my understanding of finances and investments. I recall two conversations between two different teachers while at this school about investments. The first one was an older kindergarten teacher, nearing retirement, who told me he had only invested in a specific technology stock since it first went public. He kept investing in only that one company because he believed in the company. He believed in that company so well that he had always asked for this technology company’s brand computers to be in his classroom. I asked him if he would ever think about diversifying his investment because having one exposure to one company is “having all your eggs in one basket.” He understood the nature of the risk, but he insisted on having it this way because the investment had been “paying off” for him.
Another conversation was with a fourth-grade teacher, who now has become an assistant principal, regarding the basics of investing. He and I would talk about how individual stocks would move based on the market that day. He was quite fascinated by the way markets moved but was afraid to pull the trigger on investing. He would always ask me if I managed his money, how would I invest it? At that time, I wasn’t a financial advisor because I was still getting my bachelor's degree, but I told him that investing takes time to research and stay on top of the changing news. I also said to him, if I ever became a financial advisor, I would create a diversified portfolio based on the level of risk he is willing to tolerate and what time frame for that investment.
That was my deciding factor; I had decided that once I finished my university studies, I wanted to get into the financial advisory industry to help manage people’s money and help them reach their financial goals. Continue reading more about my background.
There’s a common idiom in finance used by many financial advisors, “don’t put all your eggs in one basket.” I use this idiom when I talk to potential clients who have difficulty investing their money, and I also used it back when I spoke to the older kindergarten teacher that was nearing retirement. Basically, this idiom refers to one should not concentrate all efforts or resources in one area, or then one could lose everything. Taking the example of the conversation with the kindergarten teacher, he had a high concentration of a technology company in his investment account. He was exposing a considerable risk of losing everything if the company began to perform poorly, and his investment would perhaps start to dwindle. He was also nearing retirement, meaning his time horizon for tapping into his savings and retirement funds was much closer. Having such exposure to one company and “betting” that it will continue to outperform is like cramming at the very last minute for an exam. You have all this information that you need to put into your mind in a short time, but your mind cannot process it all at once. There is a high probability that passing the exam is not in your favor. The answer to not “put all your eggs in one basket” for investing is asset allocation.
Asset allocation is a technique of dividing different classes of investments to minimize the risk while increasing the probability of having a positive return. Each class over time works differently depending on how the economy performs. To simplify it with an example, think of a grocery store. This grocery store has different classes of products that it offers to its customers. One day customers may feel they would want one type of product, but they would prefer something different the next time they visit. This variety of product classes the store offers increases the store’s probability of making money. Some consider asset allocation construction as an art form because choosing which asset category to pair with other asset categories will help minimize the risk of losing money while increasing the probability of a return while within your risk tolerance level.
How do you arrive at the right asset allocation? There is no formula for the “right” asset allocation as each person is unique. Each person has different levels of risk tolerance and time horizons. A good starting point is knowing your risk tolerance level. Some investments fluctuate at different levels compared to other investments. Those investments that fluctuate at a higher rate may have the potential for higher returns but carry a higher risk. It is essential to select investments that coincide with your risk tolerance level. Another factor to consider is the time horizon. Simply asking yourself, when will I need the money, and at what rate will I be withdrawing money? Understanding the time horizon of when the withdrawal will occur helps your account grow if the time is longer. If it is a longer time horizon, it can go through the market’s regular ups and downs while allowing you to stomach these fluctuations. Whereas if the time horizon is shorter, perhaps you may not be able to stomach such fluctuations.
Annuities in Retirement Accounts
I have come across where there are annuities in retirement accounts. It is prominently in plans such as 403b’s for non-profits and government agencies like public schools if you ignore or don’t understand your investments. An annuity is a contract between you and an insurance company where you make a series of payments, and in return, you will receive a regular stream of income in the future. The goal of an annuity is to provide income during retirement. Often annuities are comparable to bank Certificate of Deposits (CDs) but pay a little higher return. Like CDs, an annuity is a low risk since the risk falls on the insurance company to pay you. Also, you’re betting against the insurance company that you will live longer than they expect. The agent that sold you the annuity may have made a large commission on you signing up for it and continue to earn commissions as you continue to make payments into the annuity. You can get out of an annuity, but there are high withdrawal fees, also known as surrender fees.
An annuity within your retirement account may not make sense, or it should not be your only class of investment. An annuity is tied to the level of interest rates at the time you signed up. Therefore, during low-interest rates, the return may not be the best. Annuities may not keep up with the level of inflation, and thus your money for retirement may not be keeping up. An annuity may not meet your risk tolerance. Perhaps you scored a high number in your risk tolerance, yet annuities are for a lower level of risk.
Why should you be checking your retirement account often? As the examples from the conversation that I had with those two teachers when I was a paraprofessional. You can either be highly concentrated in one asset class, thus exposing to higher risk or not coinciding with your risk tolerance and leaving potential returns on the table. Secondly, you may be just in cash as you may not be able to pull the trigger. Being in cash hurts your retirement account because it loses value every year because of inflation. Lastly, you may be in an annuity that a salesperson sold you on without you knowing the mechanisms of how it works. Hopefully, they did educate you about how annuities work or how your retirement account should be constructed to your benefit. If they did not, then they are not doing a fiduciary duty.
Remember, you have worked hard for your money, and your passion is teaching. Shouldn’t your money work harder for you while you do your passion? Knowing your risk tolerance level and time horizon gives a high-level overview of your asset allocation construction to have a retirement account that reflects your uniqueness. You need to check if your retirement account is performing for you.